HC Deb 11 June 1947 vol 438 cc1161-70
Mr. Assheton

I beg to move, in page 25, line 31, after "distributions," to insert: other than fixed preference dividends. The argument has been made from this side of the Committee that one of the chief disadvantages in the working of this tax is that it falls exclusively on the ordinary shareholders and on those shareholders who hold an equity in the company. The object of the Amendment is to try to remedy that state of affairs to some extent by treating fixed preference incomes as debentures so far as the additional 7½. per cent. is concerned. Let me illustrate this to the Committee by giving an example which will show that the tax will work unfairly as between one company and another, both companies perhaps doing exactly the same business, but whose capitalisation happens to be somewhat different.

Company "A" has a capital of, say, £500,000, of which £300,000 is in debenture stock and £200,000 in ordinary stock. Company "B" is of the same size, £500,000, with £300,000 in preference stock and £200,000 in ordinary stock. The Committee will observe that this tax, as it is designed to operate under this Bill, will fall much more heavily on the ordinary stockholders in the company whose prior stock happens to be preference stock than it will on those in the company whose prior stocks happen to be debenture stock. I do not see how that can be justified. The two companies may both have started life with £200,000 of ordinary capital; but one company is seeking to expand—perhaps to build a new factory—was obliged, owing to its financial position, to raise £300,000 by a debenture issue. The other company, being rather better placed, has been able to go to the market and get £300,000 in a preference issue, which is obviously the more prudent course to follow, if it is possible. Nobody who is responsible for the affairs of a company wants to issue a debenture, which is a mortgage upon the company, unless obliged to do so. Therefore, the prudent company directors will, if possible, go to the market and issue preference stock.

As this tax works under the Bill, it will be found that the company which has been the most cautious in building up its financial position, and which is strongest, and therefore able to issue preference stock rather than debenture stock, will be penalised. I do not know what answer the Chancellor can give. The only one I can think of is that he may say, "This is already in the tax as it now works." That may be. If it is in the tax as it now works, I am sorry that it is, and I merely seek to prevent the mischief of this tax from going any further. It is a question of equity between one company and another, both companies being in the same position, except for the fortuitous circumstance that the prior charge capital is in debenture stock in one company and in preference stock in the other.

The Solicitor-General

We are sorry we cannot accept this Amendment. In answering the case that has been made, it is rather difficult to know what to say, because during the course of the discussion on this tax, this topic has already been very fully discussed. It is, after all, one of the fundamental points of criticism made against it, and the arguments which have been advanced have already been very fully canvassed. The right hon. Gentleman gave but one more example. If one is talking in terms of equity as between company and company, supposing the distribution of preference share capital were exempted, it could be said equally, the other way round, that the company which had a large preference share capital was being greatly favoured as against the company which had a small preference share capital and a large ordinary share capital. Thus, although the right hon. Gentleman can cite a case on one side, it is not diffi- cult to cite cases on the other side in which the result of accepting this Amendment would be to work very unfavourably against companies with a large ordinary capital.

8.30 p.m.

As I said, the basic principles upon which this Amendment rests have already been fully discussed. A tax is sought to be levelled on profits at one rate, and on distributions at another. If distributions of preference shares were eliminated from the scope of the Tax, there would be a great temptation for any companies formed hereafter to form themselves with a greatly increased preference share capital, as against ordinary capital, to exclude a greater proportion of their distributed profits from the scope of the Tax. As time goes on, and as this practice is more widely adopted, a serious loss of revenue might result. The cost of the Amendment, even in a full year now, would be some £5 million, which is a not insignificant amount. As time goes on, and as the practice grows still more, the loss would be considerably more. For these reasons, I must advise my hon. Friends to oppose the Amendment.

Mr. Eccles

I agree with the Solicitor-General that the effect of this Amendment, if accepted, would be an unhealthy stimulus to the issue of preference shares. The Committee know, I think, that I am against preference shares. I consider it would be much better if we could put something in the Bill to stimulate the issue of ordinary shares, instead of which the Bill is designed to penalise ordinary shares. This Amendment is a second best. It is not the sort of Amendment which anyone with a real solicitude for the best formation of capital structure would like to put down, but it is all that is open to us once the principle of Clause 24 has been accepted.

I should like to point out how extraordinarily unfair this present arrangement can be. I have permission to quote the case of Lever Bros.—I happened to be talking to them the other day. The company has approximately £50 million as prior charges, and something in the neighbourhood of £10 million in ordinary shares. The result of the methods of imposing this tax of 12½ per cent. over the whole profits of that company, with the rebate of 7½ per cent. for profits retained, is this. It would be better for them to have a straight tax of 60 per cent. on their ordinary capital, rather than to have this 12½ per cent. spread over in this way. That shows how very unfairly these provisions hit one company as against another. I am not absolutely sure of my facts, but I think that Imperial Tobacco have ordinary capital only and no preference shares.

Mr. Assheton

They have some.

Mr. Eccles

It is a very small proportion, and for them it will not be nearly so bad. This kind of tax will fall in an entirely different way on one company as against another, according to the gearing of its financial structure. I agree that we have conceded the principle, but I ask the Chancellor to take this back and bring it forward again in a form which will impose an equal burden on all classes of investors—debenture, preference and ordinary capital. That is why I proposed in Clause 24 a withholding tax which is not calculated to push issues of capital into certain forms dictated not by the economic necessities of the business, but to avoid taxation. If the Government bring in a tax of this kind, it is bound to have the effect of forcing the financial structure of a company into a direction they would not otherwise take. That is not sound finance, but having agreed to the principle in Clause 24, I agree that it is exceedingly difficult to make this change.

Mr. Gallacher

I listened with great interest to the right hon. Gentleman the Member for the City of London (Mr. Assheton), and I have been consulting my hon. Friend the Member for Dumbarton Burghs (Mr. Kirkwood) in regard to this Amendment. If I were to address a workers' meeting, as I often do, and I explained how one company got £300,000 in debentures and another had £300,000 in preference shares, and I were to ask what I should say to the Chancellor of the Exchequer, the answer would be, "Skin the lot."

Mr. Assheton

Perhaps I may add one point in reply to the Solicitor-General. He pointed out that if this Amendment were accepted, there would be a tendency for companies to issue an undue amount of preference share capital. Is he aware that the temptation now will be to issue an undue amount of debenture capital, which is not at all in the public interest, or likely to be in the interests of the companies concerned—there will be pressure on companies to capitalise in that particular way? Many capitalisations have been designed for particular reasons.

I well remember giving advice 10 years ago when a family business was converted into a public company to provide for certain members of the family who were no longer actively engaged in the business. It was decided that a certain proportion of the capital previously in ordinary stock should be in preference stock, which was a sensible decision, because it provided retiring members with a fixed income, and the burden of management of the business and the profits and loss went to the active members of the family. That was a fortuitous circumstance, but solely on that account a penalty is now imposed in that particular case. I suggest that this illustrates what an extraordinarily bad tax this is, and nothing the Chancellor of the Exchequer or the Solicitor-General has said can convince the Committee that the tax will work equitably.

Amendment negatived.

Mr. Eccles

I beg to move, in page 25, line 36, to leave out "six," and to insert: nine months or in the case of a company carrying on business or having interests abroad twelve. The Bill provides that a dividend declared more than six months after the accounting period to which it refers is deemed to relate to the accounting period in which it is declared; that is to say, if a company's year ends on 31st December and it does not declare its dividend before 30th June, then that dividend declared after 30th June refers to the current year as far as this tax is concerned. It is deemed to be declared in reference to a year to which it does not relate. One of the bad things about modern laws is that we are always deeming things to be the case when they are not the case. This provision will inconvenience a large number of companies, because many find it difficult to get their accounts out within six months.

Section 123 of the Companies Act says that companies may present their accounts up to nine months after the closing of their books, and up to 12 months for those who have an interest abroad. It is true that in this Clause there is a provision which allows a company, which cannot get its accounts out in six months, to go to the Commissioners and to get special permission not to do so. There is a little argument between the ordinary run of business in the City and the Commissioners as to whether, if the Clause is not amended in the sense which I propose, there will or will not be a large number of companies seeking permission from the Commissioners. If there is to be an enormous queue of companies saying that they cannot get their accounts out in six months it would be better to follow the language of the Companies Act, and make the period nine or 12 months. My information is that for companies which have branches abroad six months is not reasonable.

The Solicitor-General

We feel that a case has been made out by the hon. Member, that the wording is satisfactory in the Amendment, but we would be grateful if he would withdraw it on the assurance that, on the Report stage, we will put down an Amendment, probably in exactly the same terms. We would, however, like an opportunity of looking at this point.

Mr. Eccles

I thank the hon. and learned Gentleman, and in view of what he has said I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Eccles

I beg to move, in page 26, line 8, at the end, to insert: and of any share premium reserves paid in by the members. Subsection (1) of this Clause defines what the distribution will be in the case of a company that is in liquidation. We want to make sure that not only will the nominal capital of the company be treated as capital, and not as a distribution, but also any premiums that have been paid into the company by shareholders. In other words, all subscribed money of the company's capital should be treated as capital, and not be subject to Profits tax if and when the company goes into liquidation.

The Solicitor-General

We feel that this Amendment would not have very much effect if accepted, because of the limitation of what is called the non-distribution relief which is contained in Clause 24 (3). At the same time, we would be glad if the hon. Member would give us an oppor- tunity of considering this matter further between now and the Report stage. I do not want to give a specific undertaking, but we would like to look at this matter, with a view to making a concession on the lines the hon. Member has asked.

8.45 p.m.

Mr. Eccles

I am willing to do that if I may ask the Solicitor-General a question about Clause 24 (3), which says that no distribution will be subject to the Profits Tax unless it is part of the fund of rebates that has been built up previously. Is that unlimited in scope? I suggest that there is no possibility that minuses can be carried forward, that is to say, if a company has not got a sufficient fund of rebates with which to satisfy the Profits Tax on the whole of the distribution it made in one year it would not, in the next year, have any minus carried forward.

The Solicitor-General

I do not think the second consideration would be the case, but on the first, the relief is unlimited in extent.

Mr. Eccles

In view of that, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Amendment made: In page 26, line 21, leave out "made," and insert "paid." —[The Solicitor-General.]

Mr. Eccles

I beg to move, in page 26, line 41, to leave out "in general meeting."

A peculiar position arises here, which I do not understand. A dividend declared by a company in general meeting is deemed to be declared when it is announced by the directors. On the other hand, an interim dividend is deemed to be declared when it is paid. It may be a couple of months or more between the announcement of the interim dividend and the actual day when it is paid. This seems to be an anomaly.

The Solicitor-General

I have given several undertakings, and I want to give one more now. We feel that the hon. Member has made out a case here, and, again, we would like to look at the wording. Perhaps he will withdraw the Amendment if he will accept an assurance on those lines.

Mr. Eccles

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Motion made, and Question proposed, "That the Clause, as amended, stand part of the Bill."

Mr. Eccles

There is an important point which arises on this Clause. In Subsection (3) the Chancellor is proposing to tax, by the Profits Tax, dividends which have been earned in 1946, although, in that year, the Excess Profits Tax was still in force. He is proposing to tax the excess of a dividend declared in regard to 1946 over the rate of dividend which a company paid in 1945. The Chancellor says that if a company paid 10 per cent. last year, and now puts its dividends up to 20 per cent., it may be doing that partly because it disregarded his warnings on various occasions, and partly in order deliberately to pay out more from profits which otherwise would not attract this tax. Therefore, the Chancellor does something which is unattractive, that is to say, he makes this taxation retrospective, in respect of the excess of a dividend paid this year, over what was paid last year. That is not fair in the sense that E.P.T. came off only at the end of last year, and if the Profits Tax, which on the Chancellor's own proposition is a substitution for E.P.T., is to be levied on profits which have already been charged with E.P.T. it is not fair.

We put down an Amendment to this Clause, but on thinking it over my hon. Friends and I came to the conclusion that our Amendment was not very businesslike. What we endeavoured to do was to leave the Chancellor of the Exchequer in the position to take in the excess of the dividend this year over what was paid last year, but not the excess there may be between the dividend paid this year and the whole of the profits last year. We ought to be able to find some way to prevent this little piece of double taxation which the Chancellor has insinuated into this Clause. I would remind the Committee that it is quite natural that some businesses should be paying bigger dividends in 1947 than in 1946. It is very likely that all those companies, freviously E.P.T. payers, would have higher profits this year than last year. This tax is not designed wholly to take the place of E.P.T. The Chancellor has said that it is a modest substitute. That being the case, there is nothing wrong in a company which has been paying enormous sums in E.P.T. keeping its dividend down very low indeed, and paying something more in 1947 when E.P.T. goes.

In the case of a second class of company which had its business abroad, and which was closed down by the war and probably made losses all through the war, if able to trade at all, and which is just getting on to its feet, it is not unreasonable that such companies coming back into trade and production should pay more in 1947 than in 1946. I think that Subsection (3) must have been put in simply to try to hit the companies who have not done what the Chancellor said they should do—that is to confine their dividends to what they were the year before. I submit that was never a reasonable request of the Government, because of the consideration which I have put forward.

I would not quarrel if some way could be found to put into the Bill a qualification against flagrant abuse. Here again, we have the folly of "crook catching." We only catch them for a small amount, and in order to penalise to some extent a few companies which may have irresponsibly increased their dividends in 1947, every company which increases its dividends in 1947 is likely to be involved. I think that the Chancellor ought to be able to find some way between now and the Report stage to do this thing fairly and not in a bludgeoning manner. I ask the Chancellor to have another look at this.

The Solicitor-General

We are sorry that the result of this Clause will affect particular companies unfairly. On the other hand, we do not see any alternative to putting in a Subsection in the form we have put in. The difficulty was, as I explained when we were discussing this matter in the Debate on the Report stage of the Resolution, that if we did not have a Clause of this sort it would be very easy to take advantage of the knowledge of the tax. It only applies with regard to declarations after 15th April, 1946. The Clause is really only designed to hit—as in fact it will hit—and to apply to those declarations of dividends made after the date of the Budget speech. If we did not have some such Clause it would be extremely easy by declaring higher dividends to avoid a great part of the incidence of tax liability in the year 1947. We are sorry that it works unfairly in the case of particular companies, and we will bear in mind what the hon. Gentleman has said with regard to particular instances, but we feel that there is no alternative but to introduce and maintain in the Bill the safeguards we have introduced or a safeguard in very similar terms.

Question put, and agreed to.

Clause, as amended, ordered to stand part of the Bill.